The Future of Oil: Geology Versus Technology
IMF Working Papers, May 1, 2012
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Bibliographic details
- Authors: Marcelle Chauvet, Jack G. Selody, Douglas Laxton, Michael Kumhof, Jaromir Benes, Ondrej Kamenik, Susanna Mursula
- Published: May 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475503302.001
Summary of the study
- Two diametrically opposed views reconciled:
- Geological view: physical constraints will dominate future oil output and prices; supported by world oil production plateauing since 2005 and spare capacity near historic lows.
- Technological view: higher oil prices will encourage technological solutions that raise oil output; supported by upward revisions in production forecasts since 2003 relative to purely geological forecasts.
- A nonlinear econometric model of the world oil market is presented that encompasses both geological and technological views.
- The model outperforms existing empirical models in forecasting oil prices and oil output out of sample.
Model, methods, and key technical elements
- Methodology highlights:
- Nonlinear econometric modeling that integrates competing views (geology vs technology).
- Use of revisions in production forecasts and price–response mechanisms to capture technological effects.
- Keywords and technical terms preserved from the source: adjustment cost, Bayesian econometrics, cost share, elasticities of demand and supply, exhaustible resources, fossil fuels, Hubbert’s Peak, long-run price elasticities of oil demand and supply, oil depletion, oil price growth rate, price channel, price effect, price elasticities of demand and supply, price mechanism, share of energy, supply shock.
Main findings and projections
- Point forecast:
- The model’s point forecast is for a near doubling of the real price of oil over the coming decade.
- Uncertainty and error bands:
- Error bands are wide and reflect sharply differing judgments on:
- Ultimately recoverable reserves.
- Future price elasticities of oil demand and supply.
- Empirical evidence cited in support of views:
- World oil production plateau since 2005 despite historically high prices.
- Spare capacity having been near historic lows.
- Since 2003, high prices have led to upward revisions in production forecasts based on geological views.
Implications and interpretive notes
- The coexistence of geological constraints and technological adaptation implies:
- Forecasts are highly sensitive to assumptions about recoverable reserves and price elasticities.
- Policy and market analysis should account for both physical resource limits and endogenous technological responses to price signals.
- The model’s superior out-of-sample forecasting performance suggests it can be a useful tool for scenario analysis, but wide error bands mean scenario results should be treated as contingent on underlying reserve and elasticity assumptions.
Subjects and topical coverage
- Subject areas: Commodities, Demand elasticity, Inflation, Oil, Oil prices, Oil production, Output gap, Prices, Production.
- Listed keywords (verbatim): adjustment cost, Bayesian econometrics, cost share, elasticities of demand and supply, exhaustible resources, fossil fuels, Global, Hubbert’s Peak, Inflation, long-run price elasticities of oil demand and supply, Oil, oil depletion, oil price, oil price growth rate, Oil prices, Oil production, Output gap, price channel, price effect, price elasticities of demand and supply, price elasticities of oil demand and supply, price elasticity, price mechanism, share of energy, supply shock, WP.
IMF Working Paper "The Future of Oil: Geology Versus Technology", May 1, 2012; point forecast: near doubling of the real price of oil over the coming decade; error bands reflect uncertainty about ultimately recoverable reserves and price elasticities.